One day in the fall of 1976 I arranged a meeting between Pierre Wack, who
at that time headed Royal Dutch/Shell’s Business Environment component, and
some of my colleagues in General Electric’s strategic planning staff. The
focus of our discussion was to be the role of scenarios in corporate planning.

At
that time, GE had, arguably, the most elaborate and sophisticated strategic
planning system in the corporate world, and Shell was enjoying an international
reputation for its pioneering scenarios work. Yet in each case something was
missing. Wack was convinced that his scenarios needed a tighter linkage to
strategic planning and decision-making if they were ever to engage operations
managers seriously and continuously. And GE, still shaken and puzzled by the
fallout from the first “oil shock,” needed to ground its strategy in an
assessment of the future that acknowledged, more explicitly, the inherent
uncertainties that then marked the future business environment. The two parties
thus came to this discussion from differing points of view, but focused on the
same central need: linking perceptions about the future to current decisions.

This
meeting marked a turning point in my recognition of the critical importance of
strengthening the connection between scenario development and strategic action.
From this point forward I recognized that, although developing coherent,
imaginative and useful scenarios is certainly important, translating the
implications of the scenarios into executive decisions and, ultimately, into
strategic action was the ultimate reason and justification for the exercise.

Cultural
Barriers to Implementation

Scenarios are not an end in themselves. They are a management tool to
improve the quality of executive decisionmaking. Yet experience shows that
actually using scenarios for this purpose turns out to be a more perplexing
problem than the scenario-development process itself. As in the larger domain of
strategy, implementation -- execution -- turns out to be the crucial issue.

The
causes of this implementation problem, in part practical and procedural, are
still largely cultural and psychological.The
planning culture in most corporations is still heavily biased toward
single-point forecasting. In such a context, the managers’ premise is, “Tell
me what the future will be; then I can make my decision.” So their initial
reaction, when confronted with the apparent emphasis in scenarios on
“multipoint forecasting,” is likely to be one of confusion and disbelief,
complaining that three (or four) “forecasts” are more confusing, and less
helpful, than one. The fact that this is a misperception of the nature and role
of scenarios does not in any way lessen the implementation problem.

However,
the major cultural barrier to scenario implementation stems from the way we
define managerial competence. Good managers, we say, know where they are, where they’re going, and how they’ll get
there. We equate managerial competence
with “knowing,” and assume that decisions depend on facts about the
present and about the future. The reality is, of course, that we have no facts about the future. In a 1975 presentation to the
American Association for the Advancement of Science (AAAS), I highlighted this
problem in the following way:

“However
good our futures research may be, we shall never be able to

escape from the ultimate dilemma that all
our knowledge is about the past,

and
all our decisions are about the future.”

Scenarios
face up to this dilemma, confronting us with the need to acknowledge that we do
not, and cannot, know the future. In the most fundamental way, scenarios seek,
as Pierre Wack put it, to change our “mental maps” of the future. But, in
doing so, scenarios also may seem to challenge the way we define managerial
competence. That is, by acknowledging uncertainty, scenarios underscore the fact
that we cannot know the future, and so we perceive them as challenges to our
presumptions of “knowing,” and thus of managerial competence. And because
few, if any, corporate cultures reward incompetence, managers have a vested
interest in not acknowledging their ignorance, and so in resisting the intrusion
of scenario planning into traditional forms of executive decision-making.

Dealing
with the Dilemma

A starting point for dealing with this dilemma is to establish a
clear-cut “decision focus” for every set of scenarios. At SRI International,
we insisted that the first step in the scenario process was, not a review ofthe
changing forces affecting the business environment, but rather agreement on the
strategic decision(s) that the scenarios should be designed to illuminate.1
While it is true that scenarios can also be used as a learning tool to explore
general areas of risk and opportunity, this use normally leads to the
development of more focused scenarios before decisions are taken. This crucial
step establishes, at the outset, that the ultimate purpose of the scenarios is
notjust to develop plausible
descriptions of alternative futures -- not even to redraw our mental maps of the
future, important as that is -- but rather to help executives make better, more
resilient strategic decisions. By tying scenarios to needed decisions, we
effectively link them to specific planning needs, and prevent the process from
straying off into overly broad generalizations about the future of society or
the global economy.

Usually,
the right decisions on which to focus decisions are strategic rather than
tactical. This is because scenarios normally deal more with longer-term trends
and uncertainties, often with a 5- to 10-year time horizon, rather than
short-term developments. Virtually any decision or area of strategic concern in
which external factors are complex, changing, and uncertain is a suitable target
for the scenario process. However, I have found that, the narrower the scope of
the decision or strategy (a specific investment or market entry decision, for
example), the easier the scenario construction -- and interpretation -- will be.
Developing scenarios for broad strategic concerns -- the long-range positioning
of a diversified business portfolio, for example -- is more difficult.

A
word of caution is needed at this point. While clarifying the strategic focus of
the scenarios is a critical first step, it is equally important to note that
this is not the time for strategizing. Decision makers, particularly senior
executives, have a natural impatience with analysis and a tendency to want to
“cut to the chase.” On many occasions I have had to check this otherwise
praiseworthy tendency toward action so that the context for action -- the
scenarios themselves -- can first be established. Once executives see that the
process both begins and ends with an
emphasis on action, they are more easily persuaded of the true value of scenario
planning.

What
Notto Do

Agreeing that the usefulness ofscenarios
depends upon their ability to influence executive action is a good first step
because at least itfocuses
attention on what would otherwise be a potential problem. However, it leaves
unanswered the questions: What do we do with scenarios once we have developed
them? How do we translate what we learn from them into action? Before attempting
to answer these questions, I want to stress two things that we should not
do.

First,
we do notdevelop a complete strategy for each of the scenarios, and
then by some means -- maybe by applying the test of discounted cash value --
select the one that appears to give the greatest promise of success and
profitability. I know of no management team that would willingly undertake to go
through a full-blown strategy development exercise two or three or four times
(however many scenarios have been developed). Such a course would more likely
lead to “paralysis by analysis” than to constructive action. And, in any
case, it would be based on a further misunderstanding of scenario planning: the
real aim is to develop a resilient strategy within the framework of alternative
futures provided by the scenarios.

Before
proceeding,a word of explanation
-- and caution -- is needed at this point. In a number of places in this article
I refer to the objective of scenario planning as being the development of a
resilient strategy. Now, it should be obvious that resilience is not the only
quality to be sought in a strategy; and, taken to an extreme, resilience could
mean little more than the lowest common denominator of scenario-specific
strategies. At a time that calls for bold, even radical, action in many markets,
such an interpretation would be a prescription for mediocrity at best,
extinction at worst. My point is, rather, that, before taking bold steps, the
strategy should be tested against a variety of scenarios so that the management
team is forewarned of potential vulnerabilities. Resilience can then be built
into the strategy, not by reducing its
force or boldness, but rather by “hedging” or contingency planning.

The
second thing that we do not do is assign probabilities to the scenarios and then
develop a strategy for the “most probable” one. Of course in saying this, I
am taking a controversial position; however, please take confidence from the
fact that it is a position that Pierre Wack shared. Probability has more to do
with forecasts than with scenarios; and scenarios are not forecasts, for one
cannot, reasonably and at the same time, “forecast” three or four quite
different futures. Scenarios, as a collection of futures, are intended to
establish the boundaries of our uncertainty and the limits to plausible futures.

However,
I recognize that there is a very powerful human tendency, born of past
experience and culture, to assign probabilities at the end of the scenario
process. Every individual ends up with his or her own private assessment of
probability; and it is almost certainly better to bring these assessments out
into the open for group discussion than to leave them suppressed in individual
minds. Indeed, doing this usually serves to underscore the wide diversity of
opinions -- and the consequent foolishness of trying to reach some sort of
consensus on this matter. However, whichever course of action one elects -- to
engage in this group assessment or not -- the critical point is to avoid playing
the probabilities game to the point of focusing on one “most probable”
scenario to the exclusion of the others. To do so would negate the whole value
of the scenario planning exercise.

What
to Do

Using scenarios to make strategic decisions requires considerable skill
and sophistication; and these qualities take time to acquire.Initially, therefore, any organization experimenting with scenario planning
needs some sort of a template, a primer or step-by-step approach to moving from
scenarios to strategy. Some critics will protest that this approach trivializes
strategy development, substituting analytical structure for intuitive insight.
However, in defense of this utilitarian approach, considerthe analogy of learning to play the piano. The beginner has to learn the
notes, practice scales, and play rhythmically, paced by a metronome. Only after
mastering technique can the piano player perform with feeling and insight. So
too, the beginning scenario player needs to learn some basic techniques that
will help to bridge the gap between scenarios and strategy before graduating to
a more sophisticated approach.

In
this spirit, I offer the following primer of four approaches to this problem,
ranging from the most elemental to the more sophisticated.

Sensitivity/Risk
Assessment

This
approach can be used to evaluate a specific strategic decision such as a major
plant investment or a new business development drive. Here the need for the
decision is known beforehand: the question, therefore, is simply whether or not
to proceed, after assessing the strategy’s resilience or vulnerability in
different business conditions.

A
step-by-step approach first identifies the key conditions (such as market growth
rate, changes in regulatory climate, technological developments) that the future
market or industry environment would have to meet to justify a “go”
decision, and then assesses the state of these conditions in eachscenario. It is then possible to compare the scenario conditions with the
desired future conditions, and to assess how successful and how resilient or
vulnerable, a “go” decision would be in each scenario. Finally, it is
possible to assess the overall resilience of a decision to proceed with the
proposed strategy, and to consider the need or desirability of “hedging” or
modifying the original decision in some way in order to increase its resilience.

This
approach provides a relatively straightforward application of scenarios to
decision-making, using a series of descriptive and judgmental steps. However, it
depends on having a very clear and specific decision focus, one which lends
itself to a “go/no go” decision.

An
illustration of this approach was provided by a paper company confronted with a
decision on whether or notto
invest $600 million in a new paper-making facility. The company did not normally
use scenarios in its strategic planning but decided that they would be useful
here, given the long lifespan (30-35 years) of the plant and the corresponding
range of uncertainties regarding future electronic technology development,
consumer values and time use, prospects for advertising, and general economic
conditions.

The
scenarios showed, as one might expect, vastly different levels of demand growth,
but similar patterns of eventual decline, with the timing of key threats
remaining a critical uncertainty. Playing out the investment decision in these
different environments suggested that only in the most optimistic conditions
would the company meet its “hurdle rate” for return on investment. As a
result, the executives decided on a more incremental approach to the investment,
significantly scaling down the initial plant size.

Strategy
Evaluation

Another relatively straightforward role for scenarios is to act as
“test beds” to evaluate the viability of an existing strategy, usually one
that derives from traditional single-point forecasting. By playing a companywide
or business unit strategy against the scenarios it is possible to gain some
insight into the strategy’s effectiveness in a range of business conditions,
and so to identify modifications and/or contingency planning that require
attention.

First,
it is necessary to disaggregate the strategy into its specific thrusts (e.g.,
“Focus on upscale consumer market segments,” “Diversify into related
services areas”) and spell out its goals and objectives. Then it is possible
to assess the relevance and likely success (in terms of meeting the desired
objectives) of these thrusts in the diverse conditions of the scenarios.
Assessing the results of this impact analysis should then enable the management
team to identify:

Opportunities
that the strategy addresses and those that it misses

Threats/risks
that the analysis has foreseen or overlooked

Comparative
competitive success or failure.

At
this point, it is possible to identify options for changes in strategy and the
need for contingency planning.

This
approach offers a natural and relatively simple first use of scenarios in a
corporate strategic planning system. Assessing an existing strategy requires
less sophistication than developing a new strategy; nevertheless, assessmentprovides a quick demonstration of the utility of scenarios in executive
decisionmaking by identifying important “bottom-line” issues that require
immediate attention.

A
large department-store chain introduced scenarios this way into its strategic
exploration of future patterns of change in the economy, consumer values,life styles, and the structure and operations of the retail industry. The
company used these scenarios in three distinct ways:

evaluate
the likely payoff from its current strategy

assess
and compare the strategies of key competitors (Note: This was an interesting
-- and useful -- application of scenario planning, assessing the
competitors’ as well as one’s own strategy)

analyze
retail strategy options to identify the most resilient ones for possible
inclusion in the company’s strategy (The company did, in fact, expand
greatly into specialty stores as a result of this exercise).

Strategy
Development (Usinga
“planning-focus”scenario)

This approach is an attempt to bridge the “culture gap” between
traditional planning that relies on single-point forecasting and scenario
planning. Basically, it consists of selecting one of the scenarios as a starting
point and focus for strategy development and then using the other scenarios to
test the strategy’s resilience and assess the need for modification,
“hedging” or contingency planning.

The
steps involved in this approach are as follows:

Review
the scenarios to identify the key opportunities and threats for the
business, looking at each scenario in turn and then looking across all
scenarios (to identify common opportunities and threats)

Determine,
based on this review, what the company should do, and should not do, in any
case

Select
a “planning focus” scenario (usually the “most probable” one)

Integrate
the strategic elements identified in Step 2 into a coherent strategy for the
“planning focus” scenario

Test
this strategy against the remaining scenarios to assess its resilience or
vulnerability

Review
the results of this test to determine the need for strategy modification,
“hedging,” and contingency planning.

It should be obvious that this approach flies in the face of my earlier
assertion that scenarios should not deal in probabilities. And, while the other
scenarios are not discarded, there is still the danger that this approach may
close executives’ minds to “unlikely” (which often means “unpleasant”)
scenarios and so limits their search for strategy options. However, the approach
can be justified as a useful intermediate step (between traditional and scenario
planning) in weaning executives away from their reliance on single-point
forecasting. It does not commit the ultimate sin of disregarding the other
scenarios entirely; and, in its step-by-step process, it does address many of
the key questions that scenario-based strategy should ask.

Shell
Canada used this approach when it introduced scenarios into its strategic
planning system in the early 1980s. As a member of the Royal/Dutch Shell Group,
its executives were well aware of the strict interpretation of scenario-based
planning, but felt that this modified approach would help the company ease into
the new process by making this concession to traditional thinking. In fact, the
discussion of probabilities revealed so much uncertainty in executive opinion
about future trends, that two scenarios -- each with dramatically different
drivers -- were selected as the “planning focus.”The company then proceeded to structure its strategic
positioning in answer to three questions:

What
strategies should we pursue no matter which scenario materializes?

What
strategies should we pursue if either of the “planning focus” scenarios
materializes?

How
sensitive are base strategies to variations in assumptions under contingent
conditions?

In
fact, in the end, Shell Canada did succeed, both in bridging the gap between the
old and new approaches to strategy development and in preserving the value of
considering, and planning for, different business conditions.

Strategy
Development (without using a “planning -focus” scenario)

In
this approach, executivestake all
scenarios at face value without judging probabilities and aim for the
development of a resilient strategy that can deal with wide variations in
business conditions. The step-by-step process in this approach considers:

Analyzing
each scenario to determine the optimal setting for each strategy element
(e.g., What would be the best marketing strategy for Scenario A? for
Scenario B?)

Reviewing
these scenario-specific settings to determine the most resilient option for
each strategy element

Integrating
these strategy options into an overall, coordinated business strategy.

Without
doubt, this is the most sophisticated -- and demanding -- approach, one that
most closely approximates the goal of strategizing within the scenarios
framework, and that makes optimal use of the scenarios in strategy development.
It provides management with the maximum feasible range of choice, and forces
careful evaluation of these options against differing assumptions about the
future. It does, however, demand effort, patience and sophistication, and works
best when the decisionmakers participate directly throughout the process.

This
was the case with a large European financial-services company in which the
senior management team was, in effect, both the scenario- and the
strategy-development team. After structuring scenarios around their perceptions
of the critical uncertainties facing the business, they first identified the
strategic opportunities and threats arising from these scenarios. They then used
this framework to assess the company’s current competitive position and
prospective vulnerability. Their approach to strategy development then led them
to the following steps:

Second,
to identify the optimal strategic option for each of these 11 elements in
each of the four scenarios

Finally,
to select the most resilient option for each element, and to integrate the
options into a coherent strategy for the company.

Conclusion

I have chosen to emphasize this one aspect of scenario planning -- moving
from the scenarios themselves to strategy development to action -- because, in
my experience, it is perhaps the most critical phase of the scenario process.
More scenario projects fail because they have no impact on strategy and
management decisions rather than because they were unimaginative or poorly
constructed.

Moving
from traditional planning to scenario-based strategic planning requires a
transformation of corporate culture. Scenario planning is not merely a new
planning tool, but rather a new way of thinking. Using scenarios on a one-shot
basis requires much less investment than instituting them as an integral part of
corporate planning. Many, perhaps most, of the problems in introducing scenario
planning into an organization stem from a failure to recognize the magnitude and
duration of the implementation effort that is required to use this technology to
change the prevailing management assumptions.

Like scenarios themselves, this effort has to be tailored to the needs of the
organization, but some requirements are constant: senior management commitment,
communications, education and guidance, and practice, practice, practice. Like
the piano player, the scenarios user will be able to progress from beginning
exercises, as outlined here, to intuitive and insightful action only with time,
patience and practice.